Bank Loan Rating Introduction Bank loan rating (BLR) is an opinion on the relative degree of risk associated with timely repayment of principal and interest or fulfilling commitments on a specific bank facility, exposure or commitments. It thus reflects an opinion on the likeliho
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Beacon Ratings Financial Instruments
Bank Loan Rating Introduction Bank loan rating (BLR) is an opinion on the relative degree of risk associated with timely repayment of principal and interest or fulfilling commitments on a specific bank facility, exposure or commitments. It thus reflects an opinion on the likelihood of financial obligations being serviced on time and in full, as specified in the terms of the facility.The primary focus of BLR rating is to assess future cash generation capability and their adequacy to meet debt obl
Bank Loan Rating
Introduction
Bank loan rating (BLR) is an opinion on the relative degree of risk associated with timely repayment of principal and interest or fulfilling commitments on a specific bank facility, exposure or commitments. It thus reflects an opinion on the likelihood of financial obligations being serviced on time and in full, as specified in the terms of the facility.
The primary focus of BLR rating is to assess future cash generation capability and their adequacy to meet debt obligations as per the repayment terms. The analysis therefore attempts to determine the fundamentals of the business and the industry and the probabilities of change in these fundamentals, which could affect the creditworthiness of the borrower.
BLR is an offshoot of banks’ capital adequacy requirement under Basel II framework. Basel Capital Accord II in respect of capital measurement and capital standards aligns capital of a bank more closely with the underlying risk a bank undertakes through providing funded and non-funded facilities in favour of client or counterparty.
Rating criteria
Rigorous analysis is made of several qualitative and quantitative factors prevailing in the borrowing entity’s business. Qualitative factors are converted into quantitative terms to avoid biases. Broad factors evaluated include industry risk, business risk, governance risk, management risk, financial risk, environmental risk. Quantitative factors include appraisal of historic and projected financials, profitability, capacity utilization, capital expenditure need, cash flow adequacy, debt servicing capacity, and free cash flow. These factors will essentially depend on the sectors in which the entity belong.
Industry risk
Industry characteristics, industry financials, global perspective, industry prospects (growing, stable, declining). Other industry factors include:
Industry structure: Number of participants, nature of competition, supply chain management
Entry and exit barriers: Start-up capital requirement, infrastructure requirement, regulatory environment, labour-intensive or capital-intensive nature of production
Level of cyclicality: Source of cyclicality such as demand, price, input prices
Technological change: Traditional, Modern
Capital expenditure requirements: Recurring, investment plans
Business risk
Market position: Competitive position, brand value, market share, nature and extent of diversification, product quality, quality control, marketing and networks
Operating efficiency: Labour relations, location of production facility, access to markets, access to supply sources, manufacturing efficiency compared to competitors
Plant, machinery and infrastructure: Plant layout, capital expenditure requirement, economies of scale, capacity utilization, product design
Position in business cycle: Product profile, nature of product such as commodity, luxury, normal, product life cycle, strategic importance, elasticity of demand
Corporate governance
Composition of board
Board meetings
Committee effective functioning
Directors’ independence
Delegation of power to management and committees
Management quality
Management track record: Previous history, corporate strategy, corporate plans, execution status of past plans and prospective plans.
Management style: Delegation of authority and responsibility
Personnel policies: Quality of professional staff, human resource plan, staff compensation package, promotion policies, incentive schemes
Regulatory environment
Operating environment
Government economic policy relating to the industry
National economic outlook
Special significance to economy
Pending litigation
Tax status
Import/ export policy
Type of credit facilities and applicable rating scale
Imported table
Funded facilities
Rating scale
Packing credit
Short-term
Cash credit
Long-term
Working capital demand loan
Long-term
Bill purchase/discounting
Short-term
Factoring/forfeiting
Short-term
Post-shipment credit
Short-term
Short term loan
Short-term
Term loan
Long-term
Mortgage loan facility
Long-term
Vendor financing
Short-term
Non-funded facilities
Rating scale
Bank guarantee
Short-term
Letter of credit
Short-term
Foreign exchange forward contract limit
Short-term
Bank loan ratings (Basel II) – Long-term medium-term scale
Imported table
Rating
Description
AAA (Highest safety)
Instruments with this rating are considered to have highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk
AA(High safety)
Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk
A (Adequate safety)
Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk
BBB (Moderate safety)
Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.
BB (Moderate risk)
Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations.
B (High risk)
Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations.
C (Very high risk)
Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations.
D (Default)
Instruments with this rating are in default or are expected to be in default soon.
Bank loan ratings (Basel II) – Short-term scale
Imported table
Rating
Description
A1
Instruments with this rating are considered to have very strong degree of safety regarding timely payment of financial obligations. Such instruments carry lowest credit risk.
A2
Instruments with this rating are considered to have strong degree of safety regarding timely payment of financial obligations. Such instruments carry low credit risk
A3
Instruments with this rating are considered to have moderate degree of safety regarding timely payment of financial obligations. Such instruments carry higher credit risk as compared to instruments rated in the two higher categories
A4
Instruments with this rating are considered to have minimal degree of safety regarding timely payment of financial obligations. Such instruments carry very high credit risk and are susceptible to default.
D
Instruments with this rating are in default or expected to be in default on maturity.